As I continue to help more and more people approach the end zone of making work optional (a.k.a. – retirement) it continues to shed light on just how little one million dollars seems these days. It was once believed that the ultimate pinnacle for wealth building was to have one million liquid dollars, but with the uncertainty in the bond markets, stock markets, and real estate markets, it has baby boomers about to retire shaking in their boots about being sacked before they score a touchdown.
Many people hear this notion being thrown about called the 4% percent rule. This rule was initially laid out by a financial planner William Bengen. He had back tested a variety of withdrawal rates using various historical rates of return and found that 4% withdrawal with the absolute highest rate that held up over a period of 30 years.
So, if you are a “millionaire” with $1,000,000 of starting capital at ‘work optional’, you would be taking out $40,000 a year in that first year of retirement. However, as many of you know, there isn’t much out there that is actually guaranteed at four percent in the marketplace today. This means that you’ll have to assume risk, and if you take out 4% in a declining stock market or a rising interest rate bond market your capital could shrink even quicker. To boot, this doesn’t even factor in inflation which surely will rise as interest rates rise in 2017.
Since most retirees these days do not have pensions, the timing of making work optional along with deciding when to take Social Security can compound the challenges even more when trying to figure out exactly how much income you’ll have in retirement and how long that will actually last. Historically, a popular “rule of thumb” was to use a number of 70% to 80% of your income to be replaced when you retire, although many in the financial planning community believe this to be inaccurate.
What I have experienced helping many clients retire is that your financial plan during retirement goes through three phases:
- Jubilation – the first five years of retirement where you will overspend your normal spending rate. Of course this is the time when you kill most of the stuff on your bucket list.
- Routine – this is the 10 to 20 years of retirement (especially up to the age of 80 to 85 where you get into your daily rituals. This may be working out, gardening, coaching, part time work, seeing family, and donating time.
- Managing Health – this is typically the 80 to 85 until the day you die where you actually begin to decrease spending outside of your health care costs (hope you plan for this one)
Knowing this information, why still does it feel like you are so poor with a million dollars in your retirement plans? The reason is that the fear of going broke is far greater than the fear of success when you know you may not have the ability to go earn like you did in the past. If your investments only produce 4% or $40,000 a year and your Social Security gives you $30,000 a year, $70,000 may seem like it should be a reasonable income to live off of in retirement, right?
WRONG. If you don’t have a game plan, a budget, and the proper protection in place, you will always feel like you are going to run out of money. This is in part why you should always be thinking about your investments in three ways. What can provide you security? What can provide you a paycheck? What can provide you growth? If you set up the right G-P-S system, the right withdrawal amounts, and the right overall game plan you don’t have to feel like a “poor” millionaire.